I’m the Washington D.C. bureau chief for Forbes and have worked in the bureau for more than two decades. I've spent much of that time reporting about taxes -- tax policy, tax planning, tax shelters and tax evasion. These days, I also edit the personal finance coverage in Forbes magazine and coordinate outside tax, retirement and personal finance contributors to Forbes.com. You can email me at jnovack@forbes.com and follow me on Twitter @janetnovack.

The IRS Art Advisory Panel Has Its Head In The Clouds

Today’s New York Times catches up with Forbes’ February report on the bizarre tax dispute over the value of Robert Rauschenberg’s famous collage “Canyon”—part of the estate of modern art dealer Ileana Sonnabend, who died in 2007 at the age of 92.

The Sonnabend estate tax return put her total worth at $876 million, including $0 for “Canyon,” based on appraisals from Christie’s and others. The $0 appraisals hinged on the fact that since the collage includes a stuffed bald eagle, it can’t legally be sold; the seller would be violating two federal laws protecting bald eagles and risking a year in the pen. (After U.S. Fish & Wildlife agents spotted the eagle in 1981, Sonnabend got a special permit to retain “Canyon” and lend it to museums; it’s now hanging at New York’s Metropolitan Museum of Art.)

Yet in a Notice of Deficiency sent to the estate last October, the IRS valued the work at $65 million and demanded an additional $29 million in tax and an $11.7 million “gross valuation misstatement” penalty. Art works are valued by the IRS with the help of the Art Advisory Panel–a committee of independent experts, chaired by an IRS official, the Director of Art Appraisal Services. So how could “Canyon” be worth $65 million if it couldn’t legally be sold?

Ralph E. Lerner, the top art lawyer representing the estate, told Forbes that when he called Joseph Bothwell, the (since retired) IRS Director of Art Appraisal Services to complain, “he told me there could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.” (The IRS declined to comment on the case or to make Bothwell or another official available for an interview with Forbes. It also declined comment to the Times.)

But here’s the tidbit the New York Timesstory adds today about the deliberations of the art panel:

One of its members is Stephanie Barron, the senior curator of 20th-century art at the Los Angeles County Museum of Art, where “Canyon” was exhibited for two years. She said that the group evaluated “Canyon” solely on its artistic value, without reference to any accompanying restrictions or laws.

“The ruling about the eagle is not something the Art Advisory Panel considered,” Ms. Barron said, adding that the work’s value is defined by its artistic worth. “It’s a stunning work of art and we all just cringed at the idea of saying that this had zero value. It just didn’t make any sense.”

Surreal. Okay, so if the art panel was swept away by a “stunning work of art” and didn’t look at all the facts that should go into a valuation, isn’t that what the tax grown-ups at the IRS are for? The IRS staff is free to depart from the Art Advisory Panel’s recommendations, as it did 7% of the time in Fiscal 2011, the panel’s annual report shows.

In fact, according to what Lerner told Forbes, the IRS auditor in charge did seem to realize the art panel’s feet might not have been planted in terra firma and sent the estate an unsigned report suggesting “Canyon” would be valued at $15 million. When Lerner refused to agree it had any value, the estate was sent the $65 million assessment and he called Bothwell who then offered the creative Chinese billionaire defense. “The government is saying we want $35 million in tax but if you sell it to get the money we’ll put you in jail,’’ Lerner told Forbes.

The estate has appealed the tax bill in U.S. Tax Court and, as is standard in such cases, the litigation has been put on hold while the parties see if they can negotiate a settlement.

It’s true that the government has long asserted (with some support from case law) that contraband items in an estate (drugs, stolen art, stolen jewels or a purchased artwork that turns out to be a protected antiquity, say belonging to foreign government or a Native American tribe) can be valued for estate tax purposes at their black or “illicit market” value. But usually, the deceased showed a readiness to traffic in the black market—for example, there was the infamous case of Joe T. Meador, the U.S. Army lieutenant who in the final days of World War II stole a cache of medieval artworks and manuscripts that belonged to a cathedral in Germany. (More background on that case, the “Canyon” case and the black market issue is here.)

By contrast, Sonnabend and her heirs have shown absolutely no proclivity to violate the law. If the government is smart (and fair) it will cave on this one. Does it really want to litigate a case where the facts are so sympathetic to the taxpayer—an estate that played no games and has already willingly forked over $331 million in estate tax to Uncle Sam and $140 million to New York State?

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they could REMOVE the eagle and sell the remainder,yes it would fetch LESS,they could also take it over seas and sell it.so let me ask this IF it was stolen,would they not even claim it since it had a value of ZERO?o they would all of a sudden have a value for it.

Question: Has the IRS gone after the appraisers? The PPA of 2006 created appraiser penalties in cases where their appraised figures are determined to be incorrect -according to the IRS. Theoretically, this example would be a radical case in point, should the IRS follow the letter of the PPA.

Great article, the type I’ve come to expect from Forbes, especially as the IRS rules and panels are difficult to negotiate for estate attorneys.

In Washington, D.C. there are several quality appraisers of fine art, antiques and estates but they’re not always current on the IRS rules regarding tax donations and estate equitable distribution and probate. I’ve worked with several but was very happy with Washingtonian Appraisals. They serve Washington, D.C., Maryland and Virginia and are current on all facets of IRS rules and regs.

I’m an estate attorney and the appraisers at Washingtonian Appraisals impressed me by their knowledge of the change in mandatory review rules (from $20,000 to $50,000) and their familiarity with the Office of Art Appraisal Services (AAS) and the Commissioner’s Art Advisory Panel. I would recommend them for estate inventories involving fine art and antiques. Their address is www(dot)WashingtonianAppraisals(dot)com